Establishing a family trust is a decision that can have a significant impact on the benefits you and your family can receive from your family assets.
It is therefore very important that the trust is established in such a way that it will meet the needs of you and your family. For this reason, trusts should not be established thoughtlessly using standardised documents. There are a number of particularly important decisions which you need to make in establishing a family trust. Your Lawlink lawyer is trained to identify and discuss these issues with you and to ensure that the family trust you establish will meet your particular needs.
There are six major things you need to think about before setting up a family trust.
Who will be the trustees?
Trustees hold title to trust assets in their own names and have the power, subject to the trust deed, to deal with those assets as they see fit. Given the power that trustees have to control trust assets it is particularly important that you choose trustees you can trust to manage the trust affairs in a way that will provide the maximum benefits possible to the beneficiaries. Trustees must be mentally capable and over 20 years of age. You can be a trustee and a beneficiary of a trust you establish.
If you decide that you will be a trustee of your own trust, we generally recommend that you also appoint an independent trustee; this can help to protect the trust from claims that it is a sham. You can appoint anyone you trust who is mentally capable and over 20 years of age to be an independent trustee. For example, you could appoint a friend or a trusted professional advisor. Many professionals also run trust management companies which can be appointed as trustees.
Your trust deed should give at least one person the power to appoint additional trustees and to remove any trustee from office. If you set up the trust you would usually have this power of appointment and removal.
Who will be the beneficiaries?
Anybody can be a beneficiary of a trust. It is important to remember that discretionary beneficiaries do not have an automatic right to receive benefits from the trust; they only have a right to be considered by the trustees when the trustees decide to make benefits available. This means that the group of beneficiaries you choose should be wide enough to include people whom you may want to benefit from the trust, but not so wide that the trustees have to consider the needs of a large, disparate group.
The most common groups of beneficiaries are relatives, close friends, charities and other trusts established for the benefit of these beneficiaries. We generally include a power for you to add further beneficiaries to the trust once it has been established, so that the trust can be changed to meet the future needs of your family.
If you set up a trust, you can be a beneficiary as well as a trustee.
Should you establish one or more trusts?
In certain circumstances, we recommend establishing more than one trust to protect the interests of a single family. This arrangement is particularly suitable:
- where there is a particular need to separate the ownership of a family’s business assets from its lifestyle assets, such as the family home; or
- for couples where one or both members have their own children (as setting up one trust for each partner ensures that the interests of their own children will be protected).
We can discuss with you your particular needs.
How should you structure the trust deed?
The trust deed records how the trust will be administered. It is the most important document you will sign to establish your trust. The trust deed needs to be as flexible as possible, while at the same time reflecting your intentions in setting up the trust. Changing a trust deed once it has been signed is not a simple matter. It is therefore very important to ensure that the trust deed is prepared correctly at the outset.
Amongst other things, the trust deed will specify the name for the trust. You should choose a name that will help you to maintain the distinction between your personal affairs and the trust’s affairs.
What other documents do you need to prepare to complete your estate plan?
You should view your family trust as the central pillar of your estate plan. It should be accompanied by:
- a will dealing with your personal estate including any debt owed to you by the trust;
- a memorandum of wishes; and
- enduring powers of attorney documents.
- When you establish your trust you should complete a new will to deal with:
- your personal chattels;
- the debt owed to you by your trust, if any;
- the balance of your estate (which is generally left to the trust); and
- your powers to appoint trustees and beneficiaries under the trust deed.
We also recommend that you prepare a memorandum of wishes to accompany your trust deed when you establish your trust. This memorandum should set out in detail all of your intentions for the trust and in particular cover such matters as:
- how the trustees should deal with the trust assets;
- how benefits should be made available to the beneficiaries; and
- how you would like the trust to operate after your death.
A memorandum of wishes provides useful guidance for the trustees who will operate the trust after you have died. However, such a memorandum is not binding on those trustees.
You should also consider signing enduring powers of attorney covering both your personal property and your personal care and welfare. These documents give a third person, the attorney, power to act on your behalf in relation to your property and your personal care and welfare if you are out of the country or mentally incapable. The word “property” in this context is used in a wide sense to cover all of your personal assets. It will apply to any land and buildings you own, as well as to bank accounts, vehicles and any other form of personal property.
What assets should you transfer to the new trust?
Once you have decided on the structure of the trust deed you can begin the process of transferring assets to your new trust. Although you can transfer any asset to your trust, we generally recommend only transferring assets that are likely to increase in value.
If you are considering transferring an investment asset such as a rental property to your new trust, you should obtain advice from a taxation specialist on the effects of such a transfer. For example, if you have been claiming depreciation on your rental property, you may become liable for depreciation recovered if you transfer the property to your new trust.
When you have decided which assets you want to transfer to your trust, you then need to consider whether to transfer those assets by gift or by sale.
You can give assets of any value to your trust without incurring any gift duty (as gift duty was repealed with effect from 1 October 2011). However, there are a number of issues that you need to consider. These include:
- whether you will be solvent after you make the gift;
- the wider taxation implications of making the gift;
- how much direct access you need to the asset you intend to transfer; and
- what effect the gift will have on your potential eligibility for asset-tested benefits.
Giving assets to a trust can sometimes have negative consequences. If that is the case for you, you could sell your assets to your trust rather than transferring them by gift. Any sale should take place at current market value. Transfers for less than market value could be challenged by creditors and result in the trust or sale being set aside. If the trust does not have the financial resources to purchase your assets, the sale price can be recorded as a debt that the trust owes to you. This debt will be your personal asset and will be available to your personal creditors.
Under a sale arrangement, the only assets protected by the trust are:
- the increase in value, if any, of assets sold to the trust over their original market value at the time of sale;
- the amount of any gifts made to the trust (including any partial forgiveness of the debt created by the original sale); and
- any income earned by the trust that has not been distributed to beneficiaries.
Whether you give or sell your assets to your trust you need to ensure that you do not become technically insolvent as a result of the transfer. You need to have sufficient resources, after transferring your assets, to pay all of your debts (including contingent debts like personal guarantees). Any gift which leaves you insolvent could be challenged by your personal creditors and the trust may then offer little or no protection.
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